By Elizabeth A. Caruso, Esq.
To find out whether this is a myth or a fact for you, you’ll have to read this whole article!
I want to use this opportunity to highlight a few points about irrevocable trusts that sometimes make my clients think twice about using them. If you are also thinking twice at the end of this, you likely fall into the myth column.
Irrevocable trusts, for the most part, are utilized in Massachusetts to start the five-year look-back period for assets not to count on toward Medicaid eligibility. There are other uses for irrevocable trusts as part of an estate plan, but they are few and far between. These trusts need to be crafted very carefully to make sure that they meet the requirements to start the look-back period. Some of the requirements, like not being able to borrow against the equity and not being in control of the assets, can be deterring factor when considering whether to use this type of estate plan.
First and foremost, if an asset has a loan against it, like a mortgage, it cannot be transferred into an irrevocable trust without paying off or restructuring the loan. This is because in order to transfer an asset to an irrevocable trust, you need to give away the beneficial ownership. If there is a loan on the asset, giving the asset away can trigger the due-on-sale clause. For many people it is not feasible, or desirable, to pay off a loan in order to transfer an asset to an irrevocable trust. The flip side of the loan issue is that if an asset is already owned outright, and the asset is then transferred to an irrevocable trust, you are unlikely to be able to utilize the equity in that asset in the future. Most banks will not lend to irrevocable trusts.
Even if an asset is owned outright, you may not be comfortable with giving up control of the asset to someone else in order to start the look-back period. By giving up control, I mean you are transferring the asset to an irrevocable trust, but you cannot be the trustee (manager, person in charge) of the trust and you cannot be the beneficiary. This means you need to truly trust the people you create this trust with and you are entrusting them with the management of assets. If the asset you transfer into the trust is your primary residence, you are trusting the management of your home to someone else and trusting that the they won’t kick you out of the house. Now this is clearly an extreme example, but for a lot of people, this lack of control is a deterrent to an irrevocable trust.
An elder law attorney can help you understand your options for an irrevocable trust based on your own personal situation. Only you can know your comfort level with the irrevocable trust requirements.
About the Author: Elizabeth A. Caruso, Esq. is an attorney at Legacy Legal Planning, LLC, in Norwell. She has been practicing estate planning, probate, and elder law on the South Shore for more than a decade. If this article has sparked questions for you, please feel free to reach out via phone 781-971-5900 or email elizabeth@legacylegalplanning.com to schedule a time to discuss your unique situation.
